******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** DA 97-1952 Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) AT&T Corp. ) File Nos. USP-94-W-506 MCI Telecommunications Corp. ) USP-94-W-510 ) USP-95-W-360 Petitions for Waiver of the ) USP-95-W-385 International Settlements Policy ) USP-96-W-103 to Change the Accounting Rate for ) ISP-96-W-256 Switched Voice Service with Various Countries ) MEMORANDUM OPINION, ORDER AND AUTHORIZATION Adopted: September 5, 1997 Released: September 10, 1997 By the Chief, International Bureau: Introduction 1. The Commission's International Settlements Policy (ISP) requires nondiscriminatory treatment of U.S. carriers by foreign carriers. In this Order, we consider six separate petitions for waiver to permit changes in the accounting rates between the United States and various countries. AT&T has filed four petitions and MCI has filed two. 2. These petitions have been opposed by other U.S. carriers because they propose growth- based accounting rate arrangements which unfairly discriminate among U.S. carriers either because foreign monopoly carriers choose not to offer such arrangements to all U.S. carriers or the arrangements do not reasonably take into account significant differences in the level of service provided by U.S. carriers. The result would be that some U.S. carriers would benefit from the arrangement in the form of lower settlement costs while other U.S. carriers' costs would increase, impeding their ability to compete effectively in the provision of international message telephone service ("IMTS"). After reviewing the comments, we find that these arrangements are discriminatory and contrary to our ISP. 3. However, in order to benefit from the proposed reductions in accounting rates and eliminate the discrimination, we approve AT&T's petitions, and deny MCI's petitions, on the condition that all U.S. carriers negotiate a nondiscriminatory accounting rate agreement with their correspondent at a rate no higher than the average settlement of the U.S. carrier with lowest accounting rate. We expect U.S. carriers' savings in net settlement payments to be reflected in U.S. calling charges. Summary of Waiver Requests 4. AT&T's petition for waiver of the accounting rate with its correspondent in the Philippines, Philippines Long Distance Telephone ("PLDT"), seeks to establish a temporary change whereby an accounting rate of 87› would apply to service exceeding 9.5 million minutes between November 1 and November 31, 1994. The prevailing rate of $1.34 would continue to be used for service below the 9.5 million minutes. Similarly, AT&T's petition for waiver of the arrangement with its correspondent in Malaysia, Surikat Telekom Malaysia ("STM"), seeks to establish a growth-based arrangement for the same period. The prevailing accounting rate of $1.05 would apply to the first 1.5 million minutes of service in November 1994. Thereafter, service would be settled at 52.5›. Sprint opposed both petitions on the grounds that even if other carriers were offered the same proposal they would not be able to generate enough traffic to benefit from the lower accounting rate. 5. AT&T's petition for waiver of the accounting rate with its correspondent in Uruguay, Administraci’n Nacional de Telecomunicaciones ("ANTEL"), seeks to establish a growth-based arrangement with an accounting rate of $1.80 for an annual traffic imbalance below 3 million minutes and $1.00 for an annual traffic imbalance above 3 million minutes. The arrangement would be effective from January 1, 1995 through December 31, 1995. WorldCom opposes the waiver noting that over fifty percent of AT&T's traffic would be eligible for the $1.00 accounting rate. In response, AT&T requests that the Commission follow the same procedures adopted in our Bolivia Order. 6. MCI's petition for waiver with ANTEL proposes a growth-based arrangement similar to AT&T's arrangement. That is, effective January 1, 1995, an accounting rate of $1.80 would apply to an annual traffic imbalance below 3 million minutes and fall to $1.00 for minutes exceeding the threshold imbalance. MCI's arrangement has no expiration date. MCI's previous accounting rate with ANTEL was also a growth-based accounting rate structure but the rates were $1.80 for an imbalance less than three million minutes and $1.10 for minutes exceeding the threshold imbalance. Sprint and WorldCom oppose MCI's petition because they cannot generate enough traffic to exceed the threshold and benefit from the lower accounting rate. 7. AT&T's petition for waiver with it correspondent in the Dominican Republic, Compa€ia Dominicana de Tel‚fonos C. por A. ("CODETEL"), proposes a growth-based accounting rate, effective July 1, 1995 through December 31, 1995, that provides for an accounting rate of $1.10 during the "full" period and 70› during the "reduced" period for a quarterly imbalance less than eleven million minutes. The lower rate would apply to all minutes exceeding eleven million in a quarter. AT&T's previous accounting rate with CODETEL was $1.10 during the "full" period and 60› during the "reduced" period. WorldCom and Sprint oppose AT&T's waiver because AT&T's average accounting rate would be substantially lower than its competitors. 8. MCI's petition for waiver with Cable & Wireless-West Indies ("C&W") seeks to implement a retroactive growth-based accounting rate structure with rates that decline over four years. Different thresholds would apply for each point. The rates are: 1) $1.30 and $0.90 beginning April 1, 1992; 2) $1.25 and $0.90 beginning April 1, 1993; 3) $1.20 and $0.90 beginning April 1, 1994; and 4) $1.10 and $0.90 beginning April 1, 1995. MCI's accounting rate with the Caribbean locations immediately prior the proposed arrangement is $1.40 per minute. Sprint opposes this petition for waiver because it cannot achieve the threshold necessary to benefit from the lower accounting rate. Discussi on Growth-Based Accounting Rates 9. The Commission's policy is clear: it expects accounting rates to be cost-based, nondiscriminatory and transparent. Two discriminatory themes emerge from the petitions under consideration in this order. The first is where the foreign monopoly carrier has not offered an equivalent growth-based arrangement to other U.S. carriers. Second, the growth-based arrangements in all of the petitions before us fail to take into account different levels of service provided by each U.S. carrier. Because one carrier is able to generate more traffic, it qualifies for a lower incremental accounting rate which is unattainable by smaller U.S. carriers. Even if the smaller carriers' traffic exceed a threshold, they cannot achieve meaningful reductions because they generate far less traffic. The result in both situations is that smaller carriers have a significantly higher average settlement rate than the larger carrier. Both forms of discrimination violate our ISP. 10. In addition to the discriminatory impact of these growth-based accounting structures, we are concerned that the proposed accounting rates in these waivers remain above cost. Simply stated, the accounting rates are too high. High accounting rates inflate U.S. carriers' costs and magnify the issues presented by growth-based arrangements that discriminate among carriers. Higher costs place upward pressure on U.S. calling prices to the detriment of U.S. consumers. 11. An important characteristic of growth-based accounting rates structures is that a carrier's average settlement per minute declines as its service grows beyond a threshold. The rate of decline in the average accounting rate depends upon the threshold relative to a carrier's total minutes of service and the difference between the base and incremental rates. According to practice in the United States, large U.S. carriers tend to benefit from a growth-based structure more than foreign carriers and smaller U.S. carriers because the demand for the latter carriers' service normally falls short of the threshold necessary to qualify for settling at the lower rate. As a result, smaller carriers' settlements tend to be based entirely on the higher accounting rate. 12. There are other potential shortcomings to growth-based arrangements. We recognize that such arrangements can be discriminatory and impair the ability of some U.S. carriers to compete on equal terms. This result can arise even if all U.S. carriers are offered the same accounting rate structure, because U.S. carriers' traffic levels vary widely. This is true of the countries under consideration in this order. For example, AT&T accounts for the largest share of U.S. billed minutes with most countries. If a growth-based accounting rate arrangement is based on the largest U.S. carrier's traffic level, then smaller carriers, if they are offered the same arrangement, are penalized because the demand for their service falls below the threshold and they are unable to qualify for the lower incremental accounting rate. As a result, their costs are higher than the larger carrier, not because they are necessarily less efficient but because their settlement rates are inflated. 13. Even if the smaller carriers are able to surpass the threshold, they generate less traffic and thus have a smaller proportion of traffic above the threshold volume. The resulting cost differential impairs the ability of smaller carriers to compete with larger rivals, particularly where settlements are such a large component of U.S. carriers' costs. If a smaller U.S. carrier is unable to achieve traffic levels commensurate with the lower incremental rate or to find other ways to reduce its costs, there are adverse consequences. In the short run, higher costs may impede a small carrier's ability to engage in price competition. In the long run, higher costs reduce profits, which can raise the cost of capital needed to purchase technologically advanced equipment and curtail a smaller carrier's ability to introduce innovative, more cost effective service options, thus potentially placing the carrier at a competitive disadvantage. The result would be higher prices and fewer service options for U.S. consumers, and inferior market performance in the U.S. segment of the industry. 14. These problems with growth-based accounting rate arrangements are further complicated when, as here, the actual rates are not cost-based and there is no demonstration that the thresholds match output levels at which a lower incremental accounting rate is justified by a reduction in costs or that the difference in accounting rates accurately measures a difference in costs. In all of the waivers under consideration in this order, the proposed accounting rates exceed cost-based rates by a substantial margin and ignore the fact that incremental costs are quite low, perhaps close to zero. As a result, not only are the accounting rates significantly above costs, but the differences between the base rate and the incremental rate fail to reflect accurately actual cost differences. Moreover, since the thresholds vary widely among the waivers and are determined with reference to the largest U.S. carrier's level of service, the thresholds do not appear to coincide with the output levels at which incremental costs actually decline. Thus, the thresholds seem to be set at arbitrary levels. 15. Growth-based accounting rate structures, however, have several potential benefits. First, they can reduce accounting rates and provide for further reductions in the average settlement rate as traffic levels exceed the threshold by a wider margin. Second, lower accounting rates and the prospect for further reductions in the average settlement rate provide the basis for lowering international calling prices, thus benefitting U.S. consumers. Indeed, the potential for U.S. carriers to settle a portion of their traffic at a lower incremental accounting rate may provide an incentive to adopt business strategies that include price and service options designed to stimulate consumer demand. The potential to settle at lower incremental accounting rates may be a powerful incentive because international settlement costs are the largest expense incurred by U.S. carriers for international telephone service. The latest calculation of the U.S. average global accounting rate, for example, is 67› per minute, an average settlement rate of 33.5›. 16. The third potential benefit of growth-based accounting rate arrangements is that they tend to reflect an important cost characteristic of supplying IMTS. Unit costs decline as traffic volume grows because fixed costs can be spread over more units of output, i.e., minutes of service. Therefore, appropriately implemented growth-based settlement arrangements tend to promote economic efficiency. 17. We find the public interest would be served by approving these waivers because accounting rates with several countries will be reduced, but we have concerns with the discriminatory impact of growth-based arrangements and their high, above-cost levels so our approvals have conditions. We direct all U.S. carriers to negotiate arrangements with the subject foreign correspondents that eliminate the discrimination. In the interim, we direct all U.S. carriers to settle at rates no higher than the lowest average accounting rate resulting from the proposed growth-based arrangements. Table 2 summarizes AT&T's and MCI's average settlement rates for each growth-based arrangement they propose. Approving these petitions with conditions levels the playing field, promotes competition, and discourages whipsawing. 18. Nondiscriminatory growth-based arrangements that comply with this order can be implemented. Thresholds could be set with reference to each U.S. carriers' minutes in a base period or vary with each U.S. carrier's service volume. Another approach is to define the threshold with reference to U.S. carriers' combined minutes. A third approach would be to set the threshold on the basis of the ratio of a U.S. carrier's billed minutes transmitted to a foreign carrier's minutes and the foreign carrier's billed minutes to the U.S. carrier. Other approaches that result in non-discriminatory growth-based accounting rates arrangements are possible and we encourage U.S. and foreign carriers to explore such options as well. 19. Alternatively, U.S. carriers may decide to replace the growth-based structures with a single rate for all minutes. The goal is to bring accounting rates closer to cost in a manner that is equitable and does not favor one U.S. carrier at the expense of others. We articulated this goal recently in our Flexibility Order and Benchmarks Order. As we explained in those proceedings, we expect U.S. carriers to continue to negotiate actively with these foreign correspondents in order to further reduce accounting rate toward cost. Individual Petitions for Waiver of the ISP 20. Philippines. AT&T's waiver petition with PLDT proposes a growth-based structure that would reduce the accounting rate from $1.35 to 87› if service exceeds a threshold of 9.5 million minutes in the month of November, 1994. The proposal is discriminatory because it is not offered to other U.S. carriers. Even if the arrangement is offered to other U.S. carriers, the accounting rate reduction would be small because their traffic is significantly less than AT&T's. 21. In order to realize a reduction in the accounting rate, even though it is only a temporary one, we accept AT&T's petition for waiver with PLDT and direct all U.S. carriers to negotiate a nondiscriminatory accounting rate with PLDT. Pending further negotiations with PLDT, we direct all U.S. carriers to settle at a rate no higher than AT&T's average settlement rate for service provided between November 1 through November 31, 1994, consistent with our policy of nondiscrimination. We choose AT&T's average settlement rate because it is the lowest rate overall among U.S. carriers. AT&T's average settlement rate for its service terminated by PLDT in November 1994 was 62.4› whereas the other carriers' rate was 67.5›. 22. Malaysia. AT&T's waiver petition with STM raises issues similar to those in the PLDT petition because it also proposes a substantial reduction in AT&T's accounting rate if service exceeds 1.5 million minutes. If AT&T's accounting rate exceeds the threshold, its accounting rate would be 52.5› as compared to $1.05 for service below the threshold. The settlement arrangement is discriminatory because only AT&T can generate traffic exceeding the threshold. 23. In order to realize a reduction in the accounting rate, even though it is only a temporary one, we accept AT&T's petition for waiver with STM and direct all U.S. carriers to negotiate a nondiscriminatory accounting rate with STM. Pending further negotiations with STM to establish nondiscriminatory accounting rates, we direct all U.S. carriers to settle at a rate no higher than AT&T's average settlement rate for service provided between November 1 through November 31, 1994, consistent with our policy of nondiscrimination. We choose AT&T's average settlement rate because it is the lowest rate overall among carriers. AT&T's average settlement rate for its service terminated by STM in November 1994 was 50› whereas the other carriers' rate was 52.5›. 24. Uruguay. AT&T and MCI negotiated growth-based arrangements with ANTEL. Although MCI can reach the threshold imbalance of 3 million minutes in order to have the accounting rate reduced from $1.80 to $1.00, it cannot generate enough traffic to produce a significant cost savings. AT&T's minute imbalances were 7.4 million and 8.3 million in 1994 and 1995 respectively, as compared to 3.7 million and 4.7 million for MCI. Moreover, other U.S. carriers such as Sprint would not qualify for the lower accounting rate because they are unable to generate traffic exceeding 3 million minutes. For example, Sprint's imbalances were 1 million and 1.1 million minutes in 1994 and 1995, respectively. The different treatment of U.S. carriers results in a significant gap in the average settlements owed to ANTEL. We estimate, for example, that AT&T's average payment for imbalanced minutes in 1994 was 69.2›, in contrast to MCI's, which was 83.2›. For 1995, the figures were 64.5› for AT&T and 75.7› for MCI. In comparison, Sprint's average payment was 90›. 25. In order to benefit from the proposed reduction in the accounting rates, but eliminate the discrimination, we approve the proposed growth-based arrangement between AT&T and ANTEL and direct all carriers to negotiate a nondiscriminatory accounting rate agreement with ANTEL. We deny MCI's proposed arrangement because it would discriminate against MCI. In the interim, we direct all U.S. carriers to settle with ANTEL at a rate no higher than AT&T's average rates. Based on data filed with the Commission, we find that AT&T's average settlement rates on the imbalanced minutes with ANTEL were 69.2› in 1994 and is 64.5› in 1995. 26. Dominican Republic. AT&T's waiver petition with CODETEL proposes a growth- based arrangement that has not been offered to all U.S. carriers. AT&T's average accounting rate during the "full" period would fall from $1.00 to 70› for those minutes that exceed a threshold imbalance of 11 million minutes in a quarter. The proposed accounting rate would be lower than those of Sprint and WorldCom, which are $1.10 for all minutes during the "full" period. This is inconsistent with our ISP because U.S. carriers were not offered a settlement arrangement comparable to AT&T's. 27. In order to reduce the accounting rate but eliminate discrimination against U.S. carriers, we approve AT&T's petition for waiver with CODETEL and also direct all carriers to negotiate nondiscriminatory accounting rate arrangements with CODETEL. Pending further negotiations with CODETEL to establish nondiscriminatory accounting rate arrangements, we direct all U.S. carriers to settle with CODETEL at a rate not to exceed AT&T's average settlement rate on its imbalanced traffic with CODETEL for service during the period from July 1, 1995 to December 31, 1995. We choose AT&T's average settlement rate because it is the lowest rate overall among carriers. AT&T's average settlement rate for the third and fourth quarter of 1995 is 52.6›. 28. Caribbean Locations. MCI's proposed growth-based arrangement with C&W in various Caribbean locations likewise is discriminatory in that it was not offered to Sprint. The arrangement MCI negotiated with C&W is identical to the one filed by AT&T and approved in 1992. Even though MCI was offered the same arrangement the impact on settlements differs between the two carriers. MCI generates less traffic than AT&T, and in most cases, it fails to reach the threshold. As a result, MCI's average settlement is higher than AT&T's. This is inconsistent with our ISP, which requires nondiscriminatory treatment of U.S. carriers. 29. MCI's proposal matches AT&T's accounting rates but approving it would not eliminate discriminatory treatment of U.S. carriers. Therefore, we direct MCI and Sprint to negotiate nondiscriminatory arrangements with C&W. Pending negotiations, we direct all U.S. carriers to settle at rates for each of the C&W Caribbean points that do not exceed AT&T's average settlement rate on the imbalanced minutes in each year, 1992 through 1995. AT&T's petition for waiver of an accounting rate agreement in the same locations is not under consideration in this Order because its petition was unopposed and went into effect in 1992. We do, however, choose AT&T's average accounting rate because it is the lowest average settlement rate overall among carriers. AT&T's average settlement rates are summarized in Table 2. Ordering Clauses 30. Accordingly, IT IS ORDERED that U.S. facilities-based carriers negotiate nondiscriminatory settlement arrangements with ANTEL, STM, C&W (West Indies), CODETEL, and PLDT. 31. IT IS FURTHER ORDERED that all U.S. carriers shall continue their efforts to achieve significantly lower, nondiscriminatory accounting rates with ANTEL, STM, C&W (West Indies), CODETEL, and PLDT. 32. IT IS FURTHER ORDERED that AT&T's request to establish a growth-based arrangement with PLDT at $1.34 per minute up to and including 9.5 million minutes and 87› per conversation minute for minutes exceeding 9.5 million minutes, effective November 1 through November 31, 1994 is APPROVED. 33. IT IS FURTHER ORDERED that MCI, Sprint, WorldCom, and all other U.S. carriers shall base settlements with PLDT for all services provided between November 1 through November 31, 1995 at a settlement rate not to exceed 63.8›. 34. IT IS FURTHER ORDERED that AT&T's request to establish a growth-based arrangement with STM at $1.05 per minute up to and including 1.5 million minutes and 52.5› per minute for minutes exceeding 1.5 million minutes, effective November 1 through November 31, 1994 is APPROVED. 35. IT IS FURTHER ORDERED that MCI, Sprint, WorldCom, and all other U.S. carriers shall base settlements with STM for all services provided between November 1 through November 31, 1994 at a rate not to exceed 57.9›. 36. IT IS FURTHER ORDERED that AT&T's request to establish a growth-based arrangement with ANTEL at $1.80 per minute for an annual imbalance up to 3 million minutes and $1.00 per minute for minutes exceeding an imbalance of 3 million minutes, effective January 1, 1995 is APPROVED. 37. IT IS FURTHER ORDERED that MCI's request to establish a growth-based arrangement with ANTEL at $1.80 per minute for an annual imbalance up to 3 million minutes and $1.00 per minute for minutes exceeding an imbalance 3 million minutes, effective January 1, 1995 is DENIED. 38. IT IS FURTHER ORDERED that MCI, Sprint, WorldCom, and all other U.S. carriers shall base settlements with ANTEL on a rate not to exceed 69.2› in 1994 and 52.6› in 1995. 39. IT IS FURTHER ORDERED that AT&T's request to establish a growth-based arrangement with CODETEL at $1.10 during the full period and 0.70› during the reduced period up to and including the first 11 million quarterly imbalanced minutes, and 0.70› per minute exceeding 11 million quarterly imbalanced minutes, effective July 31 through December 31, 1995 is APPROVED. 40. IT IS FURTHER ORDERED that MCI, Sprint, WorldCom, and all other U.S. carriers shall base settlements with CODETEL for all services provided between July 31 and December 31, 1995 on a rate not to exceed 52.6›. 41. IT IS FURTHER ORDERED that MCI's request to establish a growth-based arrangement with C&W's Caribbean locations, effective April 1 of 1992, 1993, 1994, and 1995 is DENIED. 42. IT IS FURTHER ORDERED that all U.S. carriers shall base settlements with C&W for service provided between April 1, 1992 through April 1, 1995 on the rates shown in Table 2. 43. This Order is issued under Section 0.261 of the Commission's Rules and is effective upon adoption. Petitions for reconsideration under Section 1.106 or applications for review under Section 1.115 of the Commissions Rules may be filed within 30 days of the date of public notice of this Order (see C.F.R. Section 1.4(b)(2)). FEDERAL COMMUNICATIONS COMMISSION Peter F. Cowhey Chief, International Bureau